ICO Legal Structures
Cryptocurrencies continue to increase in popularity. New cryptocurrencies are popping up everyday, hoping that they will be the new Bitcoin. Cryptocurrencies are introduced through initial coin offerings, which are commonly referred to as ICOs. We discuss what an ICO is and what are the best ICO legal structures for launching your offering.
What Is An ICO?
Initial coin offerings allow startups to raise funds for new cryptocurrencies. ICOs allow startups to avoid the lengthy processes required by banks and venture capitalists to gain access to funding. In an initial coin offering, the early backers of a new cryptocurrency are allowed to purchase tokens in exchange for existing legal tender or other cryptocurrencies.
Cryptocurrency startups usually begin the ICO process by releasing white papers. These white papers lay out the plan for the cryptocurrency venture. They describe the purpose of the cryptocurrency, as well as the capital needed to fund the venture. White papers outline the number of cryptocurrency tokens which will be issued to the founders of the new cryptocurrency. Finally, they discuss the types of currency which will be accepted in exchange for the cryptocurrency and how long the offering will run. In an initial coin offering, investors buy a new cryptocurrency using legal tender or an existing virtual currency such as Bitcoin.
Those who support initial coin offerings usually do so in the hopes of securing a substantial profit off of the new cryptocurrency being introduced. When new cryptocurrencies are successful, they have the potential to grow in value far beyond the price at which they were initially introduced. One cryptocurrency which grew tremendously in value following its initial coin offering is Ethereum. The initial coin offering for Ethereum was held in 2014. Ethereum raised $18 millions in bitcoins during the initial coin offering. The value of the cryptocurrency at this time was US$ 0.40 per ether. Following the initial coin offering, Ethereum became extremely popular. The value of Ethereum reached a high of US$ 14 per ether in 2015 and 2016. The market capitalization was valued at over $1 billion.
ICOs share many similarities with initial public offerings, or IPOs. In an initial public offering, shares of a company are bought by investors. This is done to fund the operations of the company. In an IPO, if the money that the company requires is not raised, that money is returned to the investors. If an initial coin offering does not raise the capital required to fund the new cryptocurrency venture, those funds will be returned. The main difference between an initial coin offering and an initial public offering is that those who contribute to an initial coin offering are investors. They enjoy a stake in the company that they are investing in. In an initial coin offering, supporters are purchasing a product. The product that they are purchasing is tokens of the new cryptocurrency.
Initial coin offerings are also akin to crowdfunding in that they allow supporters to purchase a product without holding a stake in that startup. ICOs are different than crowdfunding campaigns, however, because the tokens purchased in an ICO are expected to appreciate in value. In a crowdfunding campaign, the funds raised are generally either donations or purchases of products which will not increase in value. ICOs are commonly referred to as crowd-sales for this reason.
As a side note, the exchanges can be domestic or offshore. For example if it is a foreign exchange that handles bitcoin, we call it an offshore bitcoin exchange. This arrangement often includes a secure offshore bank account. Today, most people issue their ICOs offshore for fewer regulations and enhanced privacy.
Legal Structures for Initial Coin Offerings
ICO’s are often held in the form of corporations, LLCs or foundations. Because of the regulations, most of our clients seeking ICO corporate structures have established offshore LLCs. So, what are the best countries for ICOs? We have found that the Nevis LLC is the most favorable because ICOs are unregulated in the jurisdiction. They also offer foundations. You will also establish a bank account in which to receive funds. You hold the bank account in the company name.
Nevis is part of the Federation of St. Kitts and Nevis. It is located southeast of Florida. It is one of the most ICO friendly countries. We have been establishing companies there since 1994. To get more information or to set up an company or foundation, please call us at 1-800-959-8819 in the US or Canada or internationally at +1-661-310-2929.
Types of ICO’s
There are several manners in which one can legally present their initial coin offerings. Different structures are preferable for different types of cryptocurrencies. There is no one size fits all solution. The following are the most popular structures for initial coin offerings:
Capped First-Come First-Served
In a capped first-come first-served coin offering, a cap is placed on the amount of money that the sale of tokens is allowed to generate. The tokens in this type of offering are available at a fixed price on a first-come, first-served basis. A pre-determined amount of the total supply of tokens is allocated to the founders of the new cryptocurrency. Capped first-come, first-served offerings will sometime offer discounts for limited periods in order to encourage early participation. This is the most common type of initial coin offering according to the digital asset exchange firm GDAX which Coinbase has acquired and calls Coinbase Pro.
Uncapped Token Sale
In an uncapped token sale, a buyer has the ability to purchase as many tokens of a new cryptocurrency as they wish. Likewise, there is no cap on the amount of money that the sale is allowed to generate. Uncapped token sales often last for an extended period of time. Founders and other insiders, such as the development team, are allotted a pre-determined portion of the total tokens available.
Capped Auction of Tokens
In a capped auction of tokens, purchasers have the ability to bid on the price that they wish to pay for each token. They also have the ability to bid on the total amount that the wish to spend. This type of structure imposes a cap on the amount of money which can be raised by the initial coin offering. In a capped auction of tokens, a variable amount of tokens are sold. The price of the tokens is equivalent to the lowest bid. It is also proportional to the total amount each investor pledges to spend. The number of tokens allocated to the founders depends on the number of tokens sold during the initial coin offering. This type of coin offering can use either a blind auction or Dutch auction modality.
Uncapped Token Auction
In an uncapped token auction, investors are allowed to bid for tokens like they would in a capped token auction. An uncapped token auction, however, is done in a descending order starting with the investors who made the highest bid. The sale continues in descending order until all of the tokens have been sold. In this structure, there is no cap on the amount which can be raised by the initial coin offering.
Uncapped token auctions allocate a fixed portion of the total token supply to the cryptocurrency’s founders or other insiders.
Capped Token Sale Structure with Parcel Limit
In a capped token sale structure with a parcel limit, a fixed amount of tokens are sold at a fixed price on a first-come, first-served basis. This type of sale imposes a limit on the number of tokens purchasers can buy. The cap in this type of sale is met by placing a limit on every incoming transaction. Purchasers are also restricted from undertaking multiple transactions. This is done by generating unique codes for every sale which takes place. There is a limit places on the amount of money which can be generated from a capped token sale with a parcel limit. Additionally, a predetermined portion of the overall token supply is allocated to the founders of the cryptocurrency and other insiders.
Capped Token Sale Structure with Redistribution
In a capped token sale with redistribution, purchasers are allowed to buy a predetermined amount of tokens at a fixed price. The number of tokens correlates with the total amount of money each investor pledges. Like a capped auction, the structure allows purchasers to present bids on the total amount they wish to spend. Capped token sales with redistribution refund excess payments made by purchasers for tokens. In this structure, there is a capital on the amount which the initial coin offering can raise. However, this is expressed as a cap on he number of tokens available, rather than a monetary value.
Like other ICO structures, capped token sales with redistribution allocate the insiders a fixed portion of the overall token supply. However, this is the only ICO structure which ensures every interested investor can participate. In case of oversubscription, a large majority of the investors are forced to settle for far fewer tokens than desired. However, there is a guarantee of a refund for whatever funds go unspent.
Why Take ICOs Offshore?
It is not only the structure of the ICO which must be considered carefully but also the jurisdiction where the ICO is held. There is a substantial risk of government crackdowns on initial coin offerings, especially in the United States.
The number of initial coin offerings grew exponentially in 2017. This attracted the attention of many governments which are currently taking steps to regulate initial coin offerings. In September of 2017, the People’s Republic of China announced an official ban on ICOs. The Chinese government stated that it feels ICOs are disruptive to economic and financial stability. The Chinese government also banned the use of tokens as currency on the market. Additionally, Chinese banks can no longer offer services relating to ICOs. The Chinese government’s decision caused both Bitcoin and Ethereum to experience massive drops in value. Many speculators viewed this as a sign that other countries would begin to clamp down on initial coin offerings.
In early 2018, Facebook, Twitter, and Google but the breaks on the advertisements of ICOs. Since then, the United States Securities and Exchange Commission (SEC) has begun to regulate ICOs. The government agency has been trying to treat initial coin offerings in the same fashion as initial public offerings. For the above reasons, many startups are choosing to take their initial coin offerings offshore.